Adviser charging: How has it affected advisory firms and what is fair for clients, Fiona Murphy asks.
In last month's Retirement Planner inquiry "RDR: Survive and Adapt", we found that many advisers who switched from commission-based models to fees understandably had a difficult time adapting to the changes.
Generally speaking, in the post-Retail Distribution Review (RDR) world advisers are charging fees in three separate ways: a percentage-based initial charge with fees for ongoing service, a fixed fee or an hourly fee.
Many other commentators have said the transition to
adviser charging has been a lot less tough than previously imagined. Prudential distribution change director Russell Warwick says: "When you look back at how the transition has gone, it is less painful. And if you compare it to some of the more pessimistic opinions, it certainly has gone a lot better than people have expected."
However, he acknowledges that servicing small clients has been a considerable, ongoing challenge in recent years: "The first area is it is probably a more difficult area with new clients than with existing clients.
"I pick up more concerns from advisers that it becomes more challenging to engage customers for the first time, particularly if your structure is that you're asking to be paid a fee upfront."
What challenges have we seen over the past year-and-a-half? In the Inquiry, advisers mentioned the challenges of servicing small clients, having to either segment client bases or completely abandon long-lasting relationships.
Warwick comments: "What advisers have found challenging – particularly if they're operating percentage-based offerings, where the customer has significantly more funds to invest and be managed – tends to be higher. There has been push-back at that higher end and the response has been an element of flattening out. That probably is quite a key change as in any commission-driven market, you tend to derive a basis of cross-subsidy.
"It's just simple economic principles – you derive cross-subsidies where larger customers subsidise smaller customers. Therefore, when you are moving to a position of explicit fee charging, it is not difficult to see what the impact is.
"The advisers look at the customers who pay them less money to cover the direct costs and say 'I can no longer afford to service', or they need to pay more, they need to pay disproportionate levels of costs, and so on. What we have been seeing is the unwinding of these cross-subsidies."
Fair or foul?
A recent Which? survey of 206 IFAs found clients are most likely to be charged an upfront fee, calculated as a percentage of the amount they are looking to invest. The percentage charged ranged widely, with quotes from as low as 0.5% up to 5%.
The list of hourly rates charged was just as wide, from £75 per hour up to £400 per hour, while fixed fees also spanned a wide range, the watchdog said.
One adviser warns that many advisory firms may be charging too much for their services and wonders how firms can maintain the levels they are currently charging.
One example is trail commission (a percentage fee), which is typically about 0.5% and is taken out of the sum of a client's investment each year, according to Financial Conduct Authority (FCA) guidance.
Almary Green managing director Carl Lamb says: "If we look at trail commission payments, then I can't see how people can justify taking more than 1% because what are they doing to earn that money? A range between 0.5 and 0.8% is both fair and reasonable.
"In terms of initial payments, you still hear of people taking 5% – and how on earth can they justify that? And if firms want to work on a percentage basis, then it should be between a range of 1% and 3% and capped at the later."
Meanwhile, Warwick says: "From a trend point of view, what we have seen is lower initial costs and higher ongoing servicing fees. You have seen a blend of initial and ongoing change as we have gone over the past 12-18 months, with a trend towards ongoing services.
"That's very positive. It has made advisers think about their ongoing proposition, and wanting to offer much clearer and well-thought propositions to customers in terms of what they pay for in terms of ongoing service. This year is the year where the focus will be on the economic viability of business models."
However, it is clear that fee models have been diverging widely across different advisory firms. Bradbury Hamilton managing director Sheriar Bradbury says he believes that the distinction between those companies faring well and those struggling in the wake of the RDR changes will become much more defined.
"One of our strengths lies in our ability to convert traditional commission into ongoing fees. Those who are unable to do so will very much struggle going forwards and I expect we will see further firms drop out of the market," he says.
Another concern is about percentage-based adviser charging, which the FCA has pledged to review as to whether it meets the spirit of the RDR.
Action Consulting has carried out extensive adviser research over the past year and has raised this issue.
The company's Kevin Twomey says: "Our concerns about percentage-based charging were primarily two-fold. First, how sustainable is that model, given increasing regulatory and other costs alongside the likely downturn in new business due to factors such as greater client awareness of charges and a difficult economic environment?
"Our second concern is a reflection of the concerns that the FCA seemed to be flagging up – that is, to get paid only if there was some sort of implementation involved (ie. a policy sale) that carried a risk of mis-advice.
"Additionally, there is the issue of the ongoing validity/viability of a charging model that effectively cross-subsidises the cost of advice to clients with small investments by charging clients with larger investments more (in cash terms). Though, we did also see evidence of tiered charging structures that address this to some extent."
Meanwhile, there have been renewed concerns over whether IFA firms are being transparent as they could be over their charging structures.
Are advisers being as transparent as they could be? Which? carried out a mystery shopping survey of 30 IFAs asking how much it would cost for advice on investing a £60,000 inheritance.
According to the watchdog, only 14 of them revealed their fees over the phone, while 70% do not list their prices online, making it difficult for consumers to shop around before the online meeting stage.
Following the publication, a Which? spokesperson said: "We want to see all financial advisers publishing their full menu of charges online, and if this cannot be achieved by industry-led initiatives, we want to see the FCA regulating advisers to compel them to do it.
"We think it is important for independent financial advisers to adhere to the spirit of the rules as well as the rules themselves, and this means being open about how much they charge, enabling consumers to shop around."
Of course, like any service, it may be difficult for advisers to set out their fees until they know exactly what potential clients require, and the size of their funds and assets.
But Which? do pose a good question around transparency, as it is difficult to know what a fair charge, or at least a benchmark, is for advice and it is impossible to compare charges across different firms and networks.
Perhaps this is somewhere the FCA can add more clarity over the coming year.
‘Most significant’ upgrade since launch
Changes happening over coming months
Had accepted British Steel business
Aimed at HNW clients and family groups
Set for 1 April 2019